When Will Fifth Third Bancorp Turn Around?

Fifth Third Bancorp (FITB)—like many other regional banks—has struggled through the current market environment and the stock is down more than 70% in the last year. The Ohio super regional bank has been hamstrung by bad real estate bets in the particularly depressed markets of Michigan and Florida.  The credit crunch is also making the real estate downturn that much more worrisome.

Furthermore, Ohio banks are struggling mightily of late (FITB, KeyCorp (KEY), and National City (NCC) to name a few) which does not bode well for the state’s economy going forward, as jobs continue to steadily leave the rust-belt. On June 13, FITB was downgraded by an analyst at BMO Capital and the stock was off more than 12%.

In a value methodology, such as ours, it is of great importance to be able to distinguish between a real potential value play and a “value trap.” The trouble for Fifth Third right now is that it was too exposed to the most inflated regions of the real estate bubble and those areas have plunged in value the fastest once the bubble burst. The national real estate market may well take a year or more to recover, but FITB’s holdings have likely already taken the bulk of their losses.

The BMO analysts’ concern stemmed from the possibility of a dividend cut. While a dividend cut is distressing to shareholders, FITB’s dividend yield is a whopping 13% and there is no logical reason why a company should continue paying such a generous dividend while absorbing huge losses in its mortgage portfolio.

The stock continues to hit new 52-week (and multi-year) lows and the trading volume balloons on down trading days. There are a lot of reasons for pessimism about the stock, but a contrarian investor might identify this as an opportunity. Our valuation model is more attuned to the company’s cash flow and revenues, as compared to historical norms. From this perspective there is reasonable cause for cautious optimism.  

While revenue growth has slowed in the tough economy, FITB has historically traded at 3.1-4.3 times revenue. However, the stock is currently trading only at 1.08, which is about 35% of the low end of its historically normal range. The price-to-cash number is also at an extremely low level as the stock normally trades at cash flow multiples of 15.9-22.3. The price-to-cash flow measure currently stands at 6.67.

So, by extension of this logic, if FITB could rebound to just the low end of the stock's historically normal price-to-sales and price-to-cash metrics, we would expect the stock to trade above $32. There is significant potential for a patient, long term investor who can ride out the stock until it rebounds because the current valuation is compelling.

Comments

[montgomery]

The real issues are, first, whether Fifth Third will be able to pay any dividend in the fourth quarter; second, whether the midwestern "old" economy will ever become sufficiently "new" to recover; and third, whether the Obama administration will work with Congress to exchange government-backed bonds for all bank-held mortgages AND home equity loans.

[montgomery]

And the fourth issue is whether there will soon be significant and substantial industry consolidation. Fifth Third Bank would be a natural takeover for Wells Fargo Bank (now headquartered in Minneapolis), PNC Bank, or U.S. Bancorp.

[Stewie]

This is a joke right......for FITB to trade at $32 it would take a PE of 28 which is double the current PE of Chase. Are you guys smoking something ?

[helplessobserver]

Wow, some people never get the message of the market. This bank is toast and like BSC has wiped out shareholder's equity. I can never understand how these analysts keep ignoring the market's vertick. A chart is worth a 1000 earnings forecasts. Evidently this poster is yet to discover this message.

[macroguy]

I don't follow FITB. I am a presently retired CEO of a commercial finance company and watch the stock prices and announcements of many of my old peer group members who are either banks, commercial finance companies or BDCs. This is cycle # five for me.

Revenues and earnings are complex, at times misleading and some times just wrong. Tangible assets values also have issues as they too can be overstated. But, I look first at price to tangible asset value to assess the attractiveness of a stock and am curious as to where FITB trades in this regard.

[Foosie]

Fifth Third is opening branches in Chicago in the most over-banked and expensive portions of the city. It has a large branch across the street from JPM-Chase downtown and is currently opening a branch in Hyde Park...meaning we will have five banks in small neighborhood one block from each other. They are all fighting for deposits.

[DerekSyphrett]

Macro Guy,

Great point. Ockham "Research" could learn from your perspective as they dont' seem to have much of a clue of which metrics to use in order to value a bank.

That goes for Stewie too... banks don't trade on PE's they trade on multiples of tangible asset value or book value.

I'm in a bit of a rush here at home so I'm going to get right to the point.

Fifth Third is in serious jeopardy of wiping out all shareholder equity. The number of their 100% loan to value (LTV) HELOC's and 90% LTV portfolio is on par with Countrywide Financial and Washington Mutual.

In other words Fifth Third is expensive at any price. It may rally much like Thornburg and Country Wide did before they cratered.

[Stewie]

That's a valid point for sure but about a dozen years behind the curve. Today commercial banks rely far more on fee revenue, than the loan portfolio as a their primary earnings engine. That's why many banks are now trading at multiples of tangible book that would have seemed insane in 1990. Just look to some of the recent bank mergers (last seven years) as evidence. In 1990 the market would have punished a bank who paid more than 125% of book, now deals of 3 to 4 times book are standard. I am not saying all of it is prudent but that's the way it is.

[macroguy]

U.S. bank stocks are heading for a “dead cat bounce,” says RBC Capital Markets analyst Gerard Cassidy....he says many banking stocks are still not cheap. The top 100 banking stocks are now trading at up to 190% of their price-to-tangible book value, his preferred metric, and predicts they will eventually to fall to trade at 125% of tangible book value.

[macroguy]

Stewie,

Valid point but it doesn't apply to most banks (save trust banks like Northern and Mellon). The problem with fee based revenues is they are volatile. This is why investment banks consistently trade at weak p/e ratios. When fee based revenues became difficult to project (i.e., investment banking fees from securitizations, IPOs M&A, etc.), investors tend to revert to assessing price versus book. Take a look at where the top 10 banks are trading today (JPM less than book, etc.). The more things change... the more they stay the same.


On Jun 22 05:15 PM Stewie wrote:

> That's a valid point for sure but about a dozen years behind the
> curve. Today commercial banks rely far more on fee revenue, than
> the loan portfolio as a their primary earnings engine. That's why
> many banks are now trading at multiples of tangible book that would
> have seemed insane in 1990. Just look to some of the recent bank
> mergers (last seven years) as evidence. In 1990 the market would
> have punished a bank who paid more than 125% of book, now deals of
> 3 to 4 times book are standard. I am not saying all of it is prudent
> but that's the way it is.